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Monitoring Executive Behaviour Inside and Outside the Workplace

June 10, 2008
by Israel Foulon LLP

Monitoring Executive Behaviour Inside and Outside the Workplace –
Vicarious Liability, Harassment, Criminal Behaviour and Drug and Alcohol Testing

Inappropriate behavior by executive employees seems to be getting greater and greater attention in the North American media and in North American Courts.  Many recent highly publicized Court cases in Canada and the United States have dealt with a number of issues surrounding improper payments taken by executives (such as for non-competition payments or other inappropriate compensation amounts), insider trading or insider tipping, acts of workplace bullying, harassment or sexual-harassment, or criminal conduct by executive employees.

When executive employees engage in such behavior, they create sometimes criminal consequences for themselves but they also create exposure for litigious claims against their corporate employers through the concept of vicarious liability.

Vicarious Liability

Employers are not liable for all wrongful acts of their employees. Traditionally, employers in Canada have only been vicariously liable for acts that were committed in their employees’ “course of employment,” or acts that were was implicitly or explicitly authorized by the employer.   Vicarious liability could also be found if the employer authorized the employee to perform an act, which in itself was not wrongful, but the employee chose to perform that act in a wrongful manner.

Recent expansion in this area of the law is exposing employers to risks of vicarious liability for employee actions that are clearly beyond the employees’ course of employment and which in fact appear to extend to employees doing precisely the opposite of what they have been hired to do.

Vicarious liability claims have become more frequent because the courts are willing to look to the “deep pocket” to compensate victims for the acts committed by wrongdoers who lack the money to compensate victims.

One reason that employer vicarious liability remains controversial — despite having existed for centuries — is that the policy rationale underlying this doctrine is uncertain.

In short, while no one doubts that employer vicarious liability exists, there is no general agreement as to why it exists. This disagreement is not merely a sterile academic debate; employer vicarious liability for the misconduct of employees may vary depending on the policy rationale that is accepted as animating and forming the base of the doctrine of employer vicarious liability.

There are several general contemporary schools of thought on the policy rationales as to why employers should be vicariously liable for the harms caused by their employees. Most notable are the following:

Cost internalization and loss distribution — As a matter of efficiency, an employer is better able to distribute the costs of employee-caused damages through higher prices. Employers generally have deeper pockets than either the victim (of the employee’s deliberate misconduct) or the employee himself and are better able to absorb and distribute the loss. It is reasoned that since the employer benefits by having its employee provide the services for which the employer receives remuneration, that it is the employer that must run the risk of the employee causing harm.

Deterrence and corrective justice — Employers, knowing that they can be held faultlessly liable will be encouraged to improve hiring, firing, training and supervisory practices to control or reduce the harms caused by their employees. Employers, it is argued, are in a better position to control or reduce the harm caused by their employees than are the victims.

It appears that the Canadian courts have accepted the pragmatic policy considerations underlying vicarious liability as expounded by John G. Fleming in The Law of Torts (9th ed., p.410): “The modern doctrine of vicarious liability cannot parade as a deduction from legalistic premises, but should be frankly recognized as having its basis in a combination of policy considerations. Most important of these is the belief that a person who employs others to advance his own economic interests should in fairness be placed under a corresponding liability for losses incurred in the course of the enterprise; but the master is a more promising source of recompense than his servant who is apt to be a man of straw without insurance; and that the rule promotes wide distribution of tort loses, the employer being a most suitable channel for passing them on through liability insurance and higher prices.”

The doctrine of vicarious liability has never required a plaintiff to demonstrate any degree of fault or negligence on the part of the employer. It has always recognized that liability flows to “innocent” employers in favour of “innocent” victims, and has justified this outcome on the basis of public policy considerations.

While the concept of no-fault employer liability for negligent or willful and deliberate acts of employees is accepted and may be necessary, its application will continue to prove to be troublesome, often inconsistent, ill-explained and misunderstood, as long as it is dominated by public policy considerations and the courts continue to look for employers with deep pockets to compensate claimants.

Some examples of recent vicarious liability decisions are the following:

In British Columbia Ferry Corp. v. Inicta Secuirty Service Corp. (1998), 167 D.L.R. (4th) 193 (B.C.C.A.),  the Deas Island docking facility near Victoria, British Columbia, went up in flames in what appeared to be arson.  Its owners wondered how the arsonists were able to act while a security guard was on duty. How did they avoid him? Was he asleep, absent or otherwise derelict in performing his duties? It turned out that the guard himself was the arsonist.

British Columbia Ferry Corp. took Invicta Security Service Corp., the agency hired to provide security and the guard’s employer, to court. The court ruled Invicta was vicariously liable. Vicarious liability in its simplest term means that a person or corporation is legally responsible for the misconduct of another. In the context of employment law, it means employers are liable for certain wrongs, either negligent and/or intentional, committed by their employees.

The guard had given two versions of events. The first, given to police shortly after the fire, was that he observed it on a video monitor in the guard station.

The second, given after he failed a polygraph test, was that he started the fire accidentally by tossing a lit cigarette into a bucket he assumed to contain water which then burst into flames. No bucket was found after the fire.

A fire inspector concluded the fire could not have been started in the way the guard testified. The Court, therefore, not surprisingly, found that the fire was deliberately set by the guard. Damages in the amount of $65,000, together with costs, were awarded against the employer because the company had been hired to protect and secure private property. The security company’s employee did precisely the opposite by setting fire to that property.

In Choi v. Sutton Group Central Realty Inc. (1998), 1998 CarswellOnt 354 (Gen. Div.), a real estate company was found vicariously liable for fraudulent real estate transactions committed by its agent. The victim of the fraud was a home seller who had difficulties with the English language. The agent took advantage of this and defrauded her of her deposit monies. The court determined that the real estate company had enabled the agent to commit the fraud and that therefore it should bear the loss..

In Bazley v. Curry, [1999] 2 SCR 534 and [1999] 2 SCR 570., a child-care institution was found vicariously liable for the sexual assaults committed by its employee against children. The employer was in the business of providing care to children. The pedophile employee in question provided the precise opposite of care. In this case, the Supreme Court of Canada expanded the scope of liability found under traditional vicarious liability and concluded the conduct for which the employer is vicariously liable is conduct which consists of either:  acts authorized by the employer; and unauthorized acts that are so closely connected with the authorized that they may be considered to be regarded — although incorrectly — as doing what has been authorized by the employer.

In other words, the nature of the employment relationship is being considered to determine whether there is a substantial connection between the employee’s job function and the intentional misconduct.

It is interesting to note that a similar employer was found not to be vicariously liable (narrowly by a four-to-three decision of the Supreme Court of Canada in reasons released the same day as the Bazley v. Curry case) in a situation where the wrongdoing was for the most part not committed on the employer’s premises, but in his own home. (Jacobi v. Griffiths).

Harassment Claims

In the recent case of Sulz v. Canada (Attorney General) (2006), 2006 CarswellBC 3137 (B.C.C.A.), the Court upheld a trial judgment in the province was vicariously liable for the tort of negligent infliction of mental suffering committed by a staff sergeant over a female member of the RCMP.  Total damages assessed by the trial judge were substantial.  The judge assessed total damages of $950,000 on account of general damages at $125,000, past wage loss of $225,000 and future wage loss of $600,000.  Sulz had taken a number of pregnancy leads and related sick leaves.  The trial judge found that her supervisor had engaged in harassing conduct of her including angry outbursts, intemperate remarks, unreasonable behavior and derogatory comments that caused Sulz serious emotional problems, a troubled work environment and ultimately a serious depression which resulted in the end of her career with the RCMP.  The trial judge concluded that her supervisor had committed toward of negligent infliction of mental suffering and that the province was vicariously liable for his actions.

Given the scope of influence and power that the Executive employee has it is clear that the Executive employee has a greater chance to cause harm.  There are less institutional controls on the Executive employee.  His or her behaviour is less likely to be challenged by subordinates within the organization.  He or she has greater autonomy.  A corporation only “acts” through the activities of its employees and typically it is the Executive employee who performs the actions of the greatest importance and consequence.  The Executive employee may engage in acts of corporate fraud, diversion of corporate opportunity, breach of trademark, etc. that are so closely connected with the authorized acts of the employer that the acts may be considered to be regarded — although incorrectly — as doing what has been authorized by the employer.   Vicarious liability of the employer for the Executive’s acts would follow as a result of the above decisions.

There has also been a long standing recognition by the Courts that Executive employees will be held to a higher standard when it comes to their conduct in respect of issues of harassment.  In Simpson v. Consumers’ Assn. of Canada (2001), 2001 CarswellOnt 4448 (C.A.), the Ontario Court of Appeal considered the obligations in respect of harassment issues of a person who operates in a supervisory role for an employer.  The Court noted that in Bannister v. General Motors of Canada Ltd. (1998), 40 O.R. (3d) 577 (Ont. C.A.) , the Court overruled the trial judge’s finding that the alleged conduct of the supervisor did not amount to sexual harassment justifying dismissal.  One of the errors of the trial judge was that he overlooked the respondent’s role as a supervisor and therefore the agent of the company, and that in that role, he could not be permitted to set an example as a sexual predator of young females. Carthy J.A. also held that “wearing persistence” by the harasser of the individual victims is not a necessary constituent of sexual harassment in the context of termination. On the facts, he concluded at p. 589 that:

Here, the conduct, even if not repeated in identical form with individual complainants, was, according to the complainants, pervasive in the department and, moreover, was the conduct of the supervisor directed to female subordinates generally and repeatedly. This could be a far greater concern to an employer than if the conduct was confined to one employee and was persistent. In the latter case, the problem might be able to be isolated and controlled and termination avoided.

Similarly, in the Simpson case the Court concluded that the repeated acts of sexual harassment of the Executive Director of the employer created a case for cause for dismissal.  Interestingly, in Simpson the acts of harassment occurred both inside and outside the workplace (but the outside activities often were work related events).  The Court noted at para. 82 that  “recognition of the full consequences to female staff of a supervisor’s sexual conduct is consistent with the concepts articulated by Carthy J.A. in Bannister , that a workplace supervisor is not in the same position as other employees in respect of improper conduct, and that a supervisor must carry out management’s duties to its workers and to the organization to protect both from sexual harassment claims — not be the cause of them.  The supervisor’s acts of sexual harassment and the fallout from those acts created a workplace which was “abuzz with unrestrained gossip” and which reflected “a mood of near hysteria.”  The supervisor’s conduct consisted of several incidents and ongoing situations, which although not repeated conduct with one person, amounted to a pattern of sexually harassing conduct.  Secondly, because the respondent was the executive director of the Association and the supervisor to whom the employees reported, his obligation to the Association was to ensure that sexual harassment did not occur, and to set the standard of a workplace which protected both the employees and his employer from complaints of offensive conduct.  As a result, the Court of Appeal found that the actions of the supervisor justified a termination of his employment for just cause.  Undoubtedly, if the employees who were the victims of his sexual harassment made claims against the company the company would have been vicariously liable for the executive director’s actions.

Protecting your Company from Vicarious Liability Claims

Employers can never fully protect against all potential liability for the wrongs committed by their employees. However, certain measures may help to reduce the possibility of these types of claims being successful.

What employers often fail to emphasize is proper reference checking. Most behaviours are not isolated, so background checks may yield valuable information. Contact at least three previous employers if possible. Ask about the candidate’s reliability, attendance record and working relationship with co-workers, management and customers if applicable.

Depending on the type of position in question, psychiatric testing may reveal valuable insight into a potential employee’s suitability. In other cases, conducting checks may be warranted for determining whether there is a criminal history, highway violations or licence-related infractions or restrictions, such as impaired driving charges. Even a candidate’s credit history may be relevant to positions where money is being handled.

Every HR department should have in place a process by which candidates can be thoroughly screened — in a manner that is in accordance with the human rights legislation.

Here are a few key points to keep in mind:

1. Identify areas of vulnerability. One way to determine weaknesses is to examine areas in which employees have unsupervised and/or unregulated power over potentially vulnerable third parties, including other employees.

2. Review hiring and job placement practices. Once potential weak spots have been identified, these matters can be considered in hiring and job placement decisions. The importance of adequate interviewing, screening and background search techniques cannot be over emphasized.

3. Assess existing employees. Ongoing employee evaluation and training is essential and where problems appear employers must consider the need for discipline or potentially dismissal.

4. Consider insurance coverage. Employers should review their existing insurance policies to determine to what extent, if any, they will be compensated in the event of a successful claim made for negligent or intentional damage caused by an employee.
The law is expanding. Employers need to understand that no fault liability, as described above, does exist at law and its application appears to be expanding.

5. Engage in proper training.  Ensure that all employees, but especially supervisory employees, have appropriate training in issues surrounding harassment, discrimination, performance management and sensitivity training. 

Criminal Behaviour Outside of the Workplace

It has long been the case that employee conduct outside of the workplace that seriously damages the business of the employer can create grounds for termination of the employment of the employee for just cause.  Substantial damage to the reputation of the employer as a result of conduct of the employee outside of the workplace may make the continuation of the working relationship unworkable from the employer’s perspective.  This is particularly the case for Executive employees who are often the outward face of the organization and routinely represent the organization to the public or to trade organizations or to the company’s customers/clients. 

A recent case that dealt with this issue was Kelly v. Linamar Corp. (2005), 2005 CarswellOnt 6611 (Ont. S.C.J.).  In that case, Kelly was a managerial employee of Linamar.  He was a 14 year employee with no history of performance problems.  He supervised approximately 10 to 12 employees.  He also had regular and responsible contact with suppliers and customers.

Linamar was the largest employer in the city of Guelph and strongly protected the excellent reputation it happens in the community as a good corporate citizen.

In January 2002 Kelly was arrested and charged with possession of child pornography.  The fact of his criminal charge was published in community newspapers and ultimately his association with Linamar was also disclosed.  The employer terminated Kelly three days after he had been charged for just cause on the basis that the publication of the charges to the community at large negatively affected the company’s legitimate business interests and negatively impacted upon the workplace and employee morale.

Ultimately, Kelly pled guilty to the charges against him but at the time of termination he had only been charged but not yet convicted of, a crime of moral turpitude.

The Court found that Linamar has just cause to terminate Kelly based on the nature of the charges and the effect on its corporate reputation.  The Court noted that:

Linamar has over a long period of time built up a good reputation which it jealously protects. That reputation includes the promotion of its activities with young people outlined earlier. A company is entitled to take reasonable steps to protect such a reputation and the termination of Philip Kelly was just such a step. The employer has demonstrated just cause on far more than the balance of probabilities.

This is not to say that in every case where an employee is charged with or convicted of possessing child pornography, he can be dismissed without notice and without pay in lieu of notice. Just as with almost every other area of the law, each case must be considered based on its own unique facts. The degree of responsibility exercised by the employee will be a significant issue. So too will it be necessary to examine the company’s notoriety and the degree to which, if at all, its reputation in the community will likely be affected. The question of whether company equipment was utilized will be important. It would not be appropriate to conclude that every employee who is charged with or convicted of possessing child pornography or some similar crime of moral turpitude is automatically subject to termination without compensation. It may be fair to conclude that his claim for compensation faces a long hard uphill battle, but the facts must be scrutinized carefully.

The Linamar decision rightly suggests that Executive employee’s are more likely to be successfully taken to task for misconduct they commit outside of the workplace.  The Executive’s acts of misconduct are much more likely to have a detrimental effect on the company’s reputation in the community given the Executive’s higher interaction with customers, suppliers, other business leaders and the community in general.  Had Kelly been a low level labourer the decision on this case would have likely been different.

The significance of the Linamar case is that the trial judge appeared willing to have come to the conclusion that termination for cause would have been justified even in the event that the employee was ultimately not found guilty of the alleged criminal offence.  On the facts of Linamar, that finding did not ultimately have to be made given that the employee ultimately plead guilty to the criminal charges.  However, the damage to the employer’s reputation is immediate and may not be able to withstand a prolonged criminal battle to establish that the Executive is not guilty of a crime of morale turpitude.   Depending on the nature of the criminal charge, a termination for cause may be justified even in the absence of a criminal conviction.  This, of course, seems manifestly unfair to the wrongly charged employee but the Linamar decision suggests that a Court could come to just that conclusion on the appropriate facts.

Drug and Alcohol Testing in the Workplace

Where it is believed that inappropriate Executive behavior may be caused by drug or alcohol issues, an employer often wishes to engage in testing.

In Ontario, drug testing is considered discriminatory except for a few exceptions and a considerable onus is placed on the employer to justify such testing.   It is the Ontario Human Rights Commission’s view that drug and alcohol testing in employment is discriminatory and can only be used in limited circumstances. Under this view, the primary reason for conducting such testing should be to measure impairment.

Even testing that measures impairment can be justified only if it is demonstrably connected to the performance of the job — such as employees who hold safety-sensitive positions, employees who have been involved in a significant accident or a near miss or if there is reasonable cause to believe a person is abusing alcohol or drugs and that abuse is effecting performance.

Only then should testing be used as part of a larger assessment of drug or alcohol abuse. It is the Commission’s view that by focusing on testing that actually measures impairment, especially in jobs that are safety sensitive, an appropriate balance can be struck between human rights and safety requirements both for employees and for the public.

As a first principle it is important to recognize that persons with disabilities are protected against discrimination in employment under the Ontario Human Rights Code. The Code uses an expansive definition of disability which encompasses physical, psychological and mental conditions. Severe substance abuse is classified as a form of substance dependence which has been recognized as a form of disability.

Examples include alcoholism and the abuse of legal drugs or illicit drugs. These types of abuse and dependence, therefore, can constitute a disability under the Code.

Once an employer determines an employee suffers from a disability, the employer has a duty to accommodate that disability. Therefore a positive test for drugs or alcohol will attract a duty to accommodate employees and each employee needs to be accommodated on an individual basis. The Commission takes the view that blanket rules that make no allowances for individual circumstances are unable to meet individual requirements and are, therefore, likely to be struck down as contrary to the provisions of the Code.

Despite the fact drug and alcohol testing is discriminatory on its face under Ontario human rights law, employers can nevertheless justify discriminatory rules if the employer can meet a three-part test:

1. The employer has adopted the standard or test for a purpose that is rationally connected to the performance of the job;

2. The employer adopted the particular test in an honest and good-faith belief that it was necessary to the fulfillment of that legitimate work-related purpose; and

3. The test is reasonably necessary to the accomplishment of that legitimate work-related purpose.

To show this standard is reasonably necessary, it must be demonstrated it is impossible to accommodate individual employees sharing the characteristics of the claimant without imposing undue hardship upon the employer.

It is the Commission’s view that drug and alcohol testing should be limited to determining actual impairment of an employee’s ability to perform or fulfill the essential duties or requirements of the job.  It should not be directed towards simply identifying the presence of drugs or alcohol in the body.

Drug and alcohol testing that has no demonstrable relationship to job safety and performance has been found to be a violation of employee rights. A relationship or rational connection between drug or alcohol testing and job performance is an important component of any lawful drug or alcohol testing policy. In this regard the policy must not be arbitrary in terms of which groups of employees are subject to testing.

It is likely the Commission will only find that testing of employees who are in safety-sensitive positions is justifiable. Once again it is important to note that it is the Commission’s view that because drug tests do not actually measure impairment, random drug testing is an unjustifiable intrusion into the rights of employees. With respect to random alcohol testing, use of breathalyzers is a minimally intrusive, yet highly accurate, measure of both consumption and actual impairment.

Consequently the Commission supports the view that random alcohol testing is acceptable in safety-sensitive positions especially where the supervision of the staff is minimal or non-existent, but even then only if the employer meets the duty to accommodate the needs of those who test positive.

It is also the Commission’s view that testing for either alcohol or drugs may be acceptable in specific circumstances, particularly following accidents or reports of dangerous behaviour or near-misses.

Where an employee has registered a positive test, the Code requires individualized or personalized accommodation measures. Therefore policies that result in an automatic loss of employment, reassignment or that impose inflexible reinstatement conditions without regard for personal and individual circumstances are unlikely to meet this requirement. The duty to accommodate requires that an employee shall not be found incapable of performing the essential duties of a job unless it would cause undue hardship to accommodate the individual employee’s needs, taking into account the cost of the accommodation and health and safety concerns.

The employer will only be relieved of the duty to accommodate the individual needs of the alcohol- or drug-addicted employee if the employer can show, for example, that:

The cost of the accommodation would alter the nature or affect the viability of the enterprise; or
Notwithstanding accommodation efforts, health or safety risks to workers or members of the public are so serious that they outweigh the benefits of providing equal treatment to the worker with an addiction or dependency.

Although the emphasis in the Code is ensuring that persons with disabilities are not treated in a discriminatory manner, it is recognized that in some circumstances the nature or the degree of the disability may preclude that individual from performing the essential duties of the job.

Therefore it is clear that American-style “random testing” policies of all employees and “zero tolerance” policies will not be legally effective in Ontario. When such a policy is suggested in the workplace, the above noted principles should be kept in mind and legal counsel should be sought.

There is nothing unique about an Executive employee that would set him or her apart from the above general rules.  Generally, Executives will be open to drug and alcohol testing only in a situation where there appears to be drug or alcohol impairment that is impeding performance.  Typically, with an Executive employee the first step would be to discuss the issue with the Executive to determine if he or she has a problem with which they need help.  Only where the Executive refuses to acknowledge drug or alcohol use and there continues to be a impairment effecting performance will a drug or alcohol test be appropriate.  Once a test is administered and the Executive fails the test the issue of accommodation may have to be considered if it is determined that there are abuse issues.  This is a complex area and legal counsel should be sought.

Chris Foulon is a Partner of Israel Foulon LLP, a leading employment and labour law firm in Toronto. Chris can be reached at 416.640.1550 or cf@qtw38575.mywhc.ca



Legal Disclaimer

This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation. Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.